You have helped me in the past and I hope you can help me now. My great-great-aunt died earlier this year and I am going to receive an inheritance. The inheritance is divided into two parts:
I’m a little confused about the tax implications of my inheritance. My first question is about the IRA. I know the rules changed a couple of years ago; therefore, I would like to know what my options are. I was thinking about taking the money, which is about $ 85,000, and using it to pay off the mortgage. Do you think this is a good strategy?
As for Ford shares, I plan to sell the shares as soon as I get them. Should I pay sales tax?
You’re right that tax laws have recently changed regarding the inheritance of an IRA. In 2019, the Security Act was passed, which affected tax rules on inherited IRAs. Under this new legislation, you are generally required to settle your IRA within ten years. This removed rules that required minimum distributions year after year. As long as the IRA is liquidated within ten years, distributions of any amount may be made at any time.
When distributions are made from a traditional IRA, the person receiving the distributions is taxed on that money as ordinary income. Therefore, if he had to close the IRA and make a global distribution, he would be taxed $ 85,000. This could result in you being placed in a higher tax bracket and potentially disqualifying you for certain deductions and credits due to higher income. Therefore, in most situations, I would not recommend making a global distribution in a year.
In general, I recommend making distributions based on your individual tax situation. In other words, you only take out enough annually to stay on the same tax stretch.
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Like all other tax laws, there are exceptions. The main exception affects the following beneficiaries: the spouse of the owner of the IRA, a person who is not more than ten years younger than the owner of the IRA, the minor child of the owner of the IRA, the disabled and the who have chronic diseases. These beneficiaries can follow the ten-year rule or take advantage of the life-sharing rules that were in effect before the Security Act. Unfortunately, in our case, the exceptions to the law do not apply.
As for the sale of Ford shares, you may be able to pay some taxes. The cost base of the shares is the fair market value of the shares at the date of death. Therefore, if you sell the shares at $ 14 per share and, on the date of death, the value was $ 13 per share, you will pay taxes for $ 1 per share. The sale of shares is subject to capital gains tax and any capital gains or even losses arising from the sale of inherited shares are always considered long-term. Therefore, it would be taxed at the favorable long-term capital gain rate.
It is important to remember that when you receive non-IRA shares, there is no inheritance tax. Your only tax consequences are when you sell the shares.
If you inherit an IRA, it is important to develop a distribution strategy. That way, taxes will be reduced, and for me, the money you save looks better in your pocket than anywhere else.
Rick Bloom is a paid financial advisor. His website is www.bloomadvisors.com. If you would like Bloom to answer your questions, please email email@example.com.